Well the whole world was pretty much down overnight. Blame China, if you must. Today’s Financial Review reports that Chinese regulators are leaning on Chinese banks to quit lending for the rest of the month. It is probably not a request.
“The move to restrict lending is a sign the government is increasingly concerned about asset bubbles and worsening credit quality.” The concern is welcome, but probably a little too late. Chinese stocks and real estate have soared in the last year on the $1.5 trillion lending boom. Check out the chart below.
You can see that Shanghai’s composite index was up nearly 78% from the March low to the August high. Since then, it looks fairly range bound. And below it, the red line shows you the rough correlation between the All Ordinaries and China. The main difference now is that Aussie stocks are just off a new high made early in the New Year.
We freely admit to knowing very little about China, other than what we read and what we think about in our own head. But the numbers – those published by the government – show a huge fixed asset investment book over the last ten years. Whether that boom has become an unsustainable bubble is a good question. But the answer may not actually matter that much.
The point of contention is whether China’s resource-intensive phase of growth – the massive support of Australian resource prices and resource stocks – is fully mature, or has years to go. If it’s fully mature, resource demand is going to be lower and probably stock prices too. We’ll see about that.
The other global downer on the newswires comes from the U.S. housing market. New housing starts fell by 4% in December and index of homebuilder confidence fell too. But by far the more alarming news was that the Federal Housing Administration is increasing mortgage insurance premiums, demanding higher credit scores, and requiring larger down payments from new borrowers.
Don’t worry. It’s not like the FHA is getting too tight with taxpayer money. Mortgage insurance premiums are rising from 1.75% to 2.25% and the down payment required for a new loan is just 3.5%. It’s hard to imagine these moves significantly improving the FHA’s balance sheet.
According to the agency’s own figures, its share of the mortgage market has gone from 3.7% four years ago to 30% in 2009. It was a key agent – along with Fannie and Freddie – in the nationalisation of the American mortgage market. Yes, the U.S. government is keeping the mortgage market afloat…but the FHA’s cash reserves are down to 0.5% of loans outstanding (instead of the robust 2% required by an inept Congress).
All up, it could be another very bad year for American housing. That would be bad for banks, who still own a lot of housing collateral (and have carried it at what can only be described as “hopeful” valuations. And if banks are worried about further collateral destruction, they aren’t going to be in any hurry to lend money into the economy.
Instead, look for them to borrow short-term from Uncle Sam and loan the money right back to him at a higher rate. This is the dynamic that fuelled bank and brokerage trading earnings last year. Falling house prices and a stagnant mortgage market set up 2010 for more of the same.
Some people say they’re contrarian and some people really are contrarian. We just got off an hour long phone call with our friend and Strategic Investment editor Jim Davidson. Our pen literally ran out of ink during the call. We’ll let you know more about Jim’s new project later. But here are some excerpts from today’s chat.
“The earth is not getting warmer. It’s getting colder. The climate Nazis at the UN admitted this week that their claim that the Himalayan glaciers are melting away was false. I may as well have said the Great Salt Lake is going to turn to sugar.”
Jim’s put together a “Little Ice Age Portfolio” as a response to the climate change hysteria. But the investment response is secondary to the seriousness of the issue, he says. “There’s very little evidence that rising carbon dioxide levels lead to rising temperatures. It’s more likely – as temperature records show – that changes in climate are correlated to solar activity and sun cycles. Imagine that.”
“If it were true that reducing carbon dioxide emissions into the earth’s atmosphere reduced the earth’s temperature, it would be a bad idea to do it. In the Dark Ages, another period of lower solar activity, the Nile River froze. On the other hand, Rome prospered because agriculture thrived and you could grow grain in Carthage.”
“In a colder world, Canada would be an iceberg and one of the great grain growing regions of the world would disappear. People believe that because farmers plant a crop, it will be harvested and the modern world can live on a diet of high-fructose corn syrup that malnourishes people and makes them fat. But in another Little Ice age, hundreds of thousands of people would die if the world’s grain growing regions marginally declined. Billions would die if the impact was more severe.”
“The Black Death hit Europe in the Little Ice Age, too. Lower crop yields reduced the quality and quantity of nutrition available. This weakened immune systems and made people more exposed to infectious diseases. Why, if you’re a humanitarian, would you pursue a public policy that pushes a billion people who are already on the edge of starvation into outright famine?
“If winter comes early or stays late, whole crops will be wiped out. Reducing the output of food – something that would result from a colder Earth – is evil. It’s based on non-existent science in which people forecast things that may happen centuries from now based on their ideological resistance to prosperity. They are trying to force down living standards in the Western world based on their own guilt about prosperity and income inequality.”
“Global warming just another phrase for good weather. If it’s true carbon dioxide emissions warm the planet, we should burn more coal. You can tell the science is dubious because you now have a bizarre feedback loop in which warming makes the world cooler. It’s rubbish.”
“The big risk in the discrediting of the global warming crowd is that it could discredit other, more legitimate concerns about the climate, like the huge amount of harmful chemicals in our water supply. The persistence of dangerous chemicals in our recycled water is something to be really worried about. You don’t want the environment to turn into a sink for man-made chemicals.”
There was much more to report. But we’ll have to leave the rest for another day. Jim is hard at work on the January issue of Strategic. He’s analysing the possibility of a fiscal collapse in the United States, and where investors can seek refuge before it happens. Until then…
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